ISSUE: Section 4 – Insurance requirement, statutory employer, and a no-fault remedy

Jack_crop 72dpiWe all have our favorite sections of the Longshore Act.  There are the cryptic “status” and “situs” provisions of sections 2(3) and 3(a).  There are the sweeping medical care provisions of section 7; the complex average weekly wage provisions of section 10 and attorney fee provisions of section 28; the scary criminal and liability provisions of sections 5 and 38.  The section 8 grab bag of compensation provisions from scheduled awards to second injury fund relief to lump sum settlements has its proponents as the most important section.  Claims people struggle with the presumptions provided in section 20.  Don’t forget the ticking clocks in sections 12 and 13.  And so forth.

But don’t overlook section 4 (33 U.S.C. 904).  It’s relatively short, but it has important things to say.

“Section 4(a) Every employer shall be liable for and shall secure the payment to his employees of the compensation payable under sections 7, 8, and 9 (33 U.S.C. Sections 907, 908, 909).  In the case of an employer who is a subcontractor, only if such subcontractor fails to secure the payment of compensation shall the contractor be liable for and be required to secure the payment of compensation.  A subcontractor shall not be deemed to have failed to secure the payment of compensation if the contractor has provided insurance for such compensation for the benefit of the subcontractor.

(b) Compensation shall be payable irrespective of fault as a cause for the injury.”

Important points:

First, there is the “insurance requirement”.  Every employer shall secure the payment of compensation.
Second, if the employer is a subcontractor, only if such subcontractor fails to secure the payment of compensation shall the contractor be liable.
Third, a subcontractor has not necessarily failed to secure compensation if the contractor has provided insurance.
Fourth, Fault is irrelevant under the Longshore Act.

There are some tricky issues.

How do you “secure” the payment of compensation?
What is a “contractor”?
What is a “subcontractor”?
What does “failed” to secure compensation mean?”

In the course of discussing these issues, we’ll get indirectly involved with what is the common law doctrine of “borrowed employee”.

Section 32 answers the question about securing the payment of compensation.  You have two choices.  You buy insurance from an insurance carrier authorized by the U.S. Department of Labor (DOL) to write coverage under the Act, or you obtain authorization from the DOL to self-insure.

Section 4 states that every employer “shall” secure the payment of compensation.  Sections 5 and 38 provide the consequences to the employer who doesn’t properly secure payment.  Hint – it involves an election of remedies for the employee and joint and several civil and criminal liability for corporate officers.

Next, let’s consider what happens if the “subcontractor” “fails” to secure the payment of compensation.

If the subcontractor fails to secure payment then the “contractor” shall be “liable for and be required to secure the payment of compensation”.

The 1984 amendments to the Longshore Act changed the language of section 4 to require the failure of the subcontractor to secure payment in the first instance in order to shift statutory liability to the contractor.

This language deliberately overruled Supreme Court precedent in the case of Washington Metropolitan Area Transit Authority v. Johnson, 467 U.S. 925 (1984).  Under the pre-amendment version of section 4(a), a contractor could pre-empt the subcontractor’s insurance requirement by providing “wrap-up” insurance for the employees of subcontractors.  One result of this would be that the contractor would assume the employer’s immunity to tort suits by the subcontractor’s employees under the exclusivity provision of section 5(a), since it was the statutory employer.

So the 1984 amendment denies tort immunity to a contractor except in circumstances where it is forced into the role of statutory employer by the failure of the subcontractor to secure compensation.

Now we get to a difficult issue under section 4.  In this context, what is a contractor, and what is a subcontractor, such that the relationship gives rise to section 4(a) statutory employer liability?

Of course, Congress did not define the terms “contractor” and “subcontractor”, so they have been open to interpretation.

Section 4(a) premises liability on a finding that the contractor is subject to some contractual obligation to a principal which it in turn passes on in whole or in part to a subcontractor.

In a typical formulation, a contractor will be held secondarily (statutorily) liable for workers’ compensation when the injured employee was engaged in work either that is a subcontracted fraction of a larger project or that is normally conducted by the contractor’s own employees rather than by a subcontractor, or as it is sometimes unfortunately phrased, an independent contractor.

Another approach to identifying a contractor-subcontractor relationship is the “two contract” requirement.  This is where there is an employer, or contractor, passing along part of its own contractual obligation to subcontractors.  In other words, the general contractor is one who has a contractual obligation of its own, a portion of which he subcontracts to another.

Example:  A shipyard contracts for the renovation of one of its sheds.  The shipyard is the owner of the shed, not under a contractual obligation to renovate the shed.  Also, the shipyard is not in the business of renovating buildings and its employees do not usually do that type of work.  The shipyard merely contracted out the job to an “independent contractor”.  The shipyard has no liability under section 4(a) if the “independent contractor” has failed to secure compensation.

The Longshore Act in section 4 distinguishes between employers who are owners or principals and those who are general contractors working under contractual obligations to others.

So, for the statutory employer provision of section 4(a) to apply there must be a principal, a contractor, and a subcontractor relationship with a “two contract” context.

Section 4(b) is clear.  Compensation shall be payable irrespective of fault as a cause for the injury.  This is due to the nature of the concept of workers’ compensation as a compromise.  Remember, before the workers’ compensation laws were passed beginning in 1910, if a worker were injured on the job he had to sue his employer in tort based on negligence.  The employer had several effective common law defenses to such lawsuits, such as negligence of a fellow employee, assumption of risk, and contributory negligence.

Under the approach embodied in the Longshore Act and other workers’ compensation laws, the employer relinquishes his defenses in exchange for limited and predictable liability, and the employee accepts the limited statutory recovery because he receives prompt payment without the uncertainties and delays inherent in going to court.

The issue of fault is irrelevant in Longshore Act cases.  The sole exception is the defense provided in section 3(c) if the injury is due solely to the employee’s intoxication or the employee’s willful intent to injure himself or another.

This discussion has run on too long.  We’ll wait for next time to discuss how, if at all, the doctrine of “borrowed employee” fits in with the statutory employer provision of section 4.

John A. (Jack) Martone served for 27 years in the U.S. Department of Labor, Office of Workers Compensation Programs, as the Chief, Branch of Insurance and Financial Management, and the Acting Director, Division of Longshore and Harbor Workers’ Compensation.  Jack joined The American Equity Underwriters, Inc. (AEU) in 2006, where he serves as Senior Vice President, AEU Advisory Services and is the moderator of the AEU Longshore Blog.

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